Business and management

Swiss banks and American taxes

Pawn sacrifice

A MONTH ago, Konrad Hummler, managing partner of Wegelin & Co, the oldest Swiss private bank, said it was unlikely that an American court would charge his bank with tax fraud. Three of his employees, who managed accounts for American clients, had just been so charged. But indicting the bank itself would have “a destabilising effect” on the entire system, he argued.

The Southern District Court of New York clearly did not care. On February 2nd it filed its indictment against Wegelin, for conspiracy to defraud the United States by concealing undeclared accounts from the Internal Revenue Service (IRS). Mr Hummler probably saw the writing on the wall: the week before, he sold the bulk of the bank to Raiffeisen, a Swiss mutual bank, but retained Wegelin's American business and—according to the deal—any legal risk.

That makes Wegelin, founded in 1741, a shadow of its former self. But the little bank based in St Gallen is a mere pawn in a much bigger game being played between Switzerland and America over banking secrecy and tax fraud.

Since UBS, Switzerland's biggest bank, paid a $780m fine in February 2009 and handed more than 4,400 names of clients to the American authorities, the country has been trying to negotiate a “global deal”. It would include a one-time cash payment (the sum being talked about ranges from $2 billion to $10 billion) and get the Department of Justice (DoJ), the IRS and the American courts off Switzerland's back.

In the course of this negotiation several Swiss banks, in a target list of eleven, have delivered data about their American clients to Finma, the Swiss financial watchdog. Some of the information has been passed to the American authorities, but with the clients' names blacked out.

The big issue for the Swiss is whether they can preserve their hallowed bank secrecy while complying with some of the American demands. Some say that the Swiss are on a hiding to nothing, because the DoJ, the IRS and the American courts will go on hounding Swiss banks and banking authorities until they reveal actual names. Others argue more antagonistically that these banks have not broken any Swiss law, since tax avoidance is not a criminal offence. And they may not even have broken any law in America either, since holding undeclared money is not itself an offence there.

Mr Hummler has made it clear that he shares the second view. The Neue Zürcher Zeitung, of whose board he happens to be president, seems to sympathise: “Politicians look on, while just a threat from US prosecutors puts an end to the oldest Swiss bank, without establishing any breach of the law,” thundered an editorial.

But the Southern District Court's indictment makes colourful reading, even if the guns described in it may not be of the smoking kind. One Wegelin employee is said to have shuffled €16,000 cash between two clients sitting separately in the same Manhattan restaurant. And a client on a safari in Africa apparently sent a cryptic message to get his holiday paid from a Wegelin bank account.

>{Mr Hummler has made it clear that he shares the second view. The Neue Zürcher Zeitung, of whose board he happens to be president, seems to sympathise: “Politicians look on, while just a threat from US prosecutors puts an end to the oldest Swiss bank, without establishing any breach of the law,” thundered an editorial.}

I love this puncturing of a newspaper by another newspaper. This time TE scores.

OTOH, Swiss bank's days seem numbered. Like it or not (I certainly do), US relentlessly pursues it's goals even at a great cost to itself. The war on drugs show no signs of ending even as all data shows that it is futile. The war on terror is on steroids after Osama's oceanic burial. Now is the turn of war on taxevaders ... Swiss banks are just the first beachhead. US' goals are far higher. These puny banks will be wiser the sooner they realize this.

This is probably the first time that the Swiss has crossed Uncle Sam's path. After years of irritating sanctimoniousness about neutrality, I would love to see under which rock they will hide. One thing is for sure, no other nation has much love for the Swiss. And everyone will be baying for it's blood. Rare feat, for a David to earn boos against Goliath.

I for one would like to see someone stand up to the US. Switzerland is a sovereign state and has it's own laws. Who is the US to insist that Switzerland break it's own laws retrospectively?

If the US were really serious about taxing the rich, all it needs to do is eliminate all the domestic loopholes by imposing a flat tax. This would have the added benefit of getting rid of all the overpaid tax lawyers and bankers who specialise in tax planning.

When Rudy Giuliani slammed Marc Rich for trading with the enemy and tax evasion threatening him with 325 years in jail (www.solami.com/marcrich.htm#21), he had not known or cared about the fugitive's involvement in the Swiss government's efforts to get the US hostages released in Teheran (…/edouardbrunner.htm#Iran). This scalp was so valuable for Rudy that Rich had been only hours away from being kidnapped in Switzerland. On that occasion, US hardball was met with diamantball (…/diamantball.htm) rather than the traditional Swiss softball responses. As was the case when another ambitious US prosecutor, Steve Cooley, was pressing hard for Roman Polanski’s extradition (…/polanskirecord.htm). And as may yet happen again - to the delight & relief of many of Switzerland's friends around the world. After one of Rudy's successors, US Attorney Preet Bharara overstepped another red line when he and his IRS colleagues, out-of-treaty and unconscionably, armtwisted 11 Swiss banks into disgorging "non-client" yet privileged banking data, indicted a number of bank officials, and then, under warlike pressures, actually brought down Switzerland's oldest private bank, Wegelin, for alleged violations of US law.

To be sure, the biggest 2 Swiss banks, since 2000, have been instrumental in the development of the IRS' Qualified Intermediary (QI) tax collection system, covering by now some 7000 banks worldwide (Tom Donlan, Pyrrhic Victory: IRS turns foreign banks into its tax agents, Barrons, 12/4/00: …/QI.htm#Victory). Most other Swiss banks have also concluded private agreements (QIA) with the IRS. As such they benefited from a special deal with the IRS, called the „Swiss solution", providing the "right" to hide US persons subject to US taxation behind a smoke-screen of specially created off-shore companies (.../kingpin.htm#SS). Such QIA loopholes were ultimately confirmed in US Senate hearings. As contractual tax collectors for the IRS, and contrary rules notwithstanding, all QIs are requested under US law to contact and advise anywhere prospective and current bank clients on all QI-related matters. Accordingly, all charges of wrongdoing thus brought against UBS, Credit Suisse, Wegelin and others are baseless, reflect hidden agendas, and should be withdrawn forthwith or thrown out by the courts. The QI system with its new confiscatory backup withholding tax - some call it protection money - has anyway never been approved by the US. Tellingly, the IRS seems to have some difficulties answering related questions raised in the Swiss Parliament and the US Congress (.../irsquery.htm). Sample:

How is the IRS justifying its campaign to hunt down - at disproportionate political, financial and goodwill costs world-wide - suspected treaty shoppers and tax dodgers with an alleged annual loss to the US Treasury in the range of some hundred million dollars, when in fact its QI system's obscured yet real backup withholding part is designed and capable to syphon off revenue streams grosso modo one thousand times larger from the global parallel economy, as revealed and repeatedly discussed at the Cambridge International Symposium on Economic Crime? And if indeed, in the event, the IRS hasn't seen fit to use this system in order to rake in all those hundreds of billion dollars from undelicate and indeed very willing US and non-US persons - and below the radar of all democratic controls at that -, what has kept it from helping to defuse the US debt crisis and to relieve the US economy with those means?

Why, in the event, should Switzerland not recognise and treat its QI bankers and their clients as victims of a bureaucratic conspiracy - and annul forthwith the penal code exemption (art.271) which, since 2001, has allowed its bankers to support, even privilege the US economy through the disproportionally costly QI system, a conspiracy, incidently, which by now involves some 7000 foreigns banks world-wide and which - with its obfuscated, legally questionable and apparently uncontrolled confiscatory backup withholding tax - may be useful to bring a big chunk of the world's annual trillion dollar underground pot back into the "white economy"? Why, in the event, should Switzerland - with a view to help to globally re-stabilise financial markets - not lend a hand to those willing to achieve this very oblective of rechannelling marauding underground funds with more mutually beneficial and democratically better controlled ways & means? And why, in the event, should Switzerland not expect the US authorities' full cooperation - i.e. without need to take recourse to corrective & compensatory actions in the US and elsewhere - to withdraw forthwith all related administrative assistance requests, to reconsider its FATCA and similar anti-freedom, anti-sovereignty and anti-market plans, and to stop all proceedings against what are seen to be hood-winked and essentially falsely accused Swiss banks and their thus improperly persecuted clients?

Actually, it would be sufficient to get rid of the loopholes, even if a progressive tax structure was retained. A flat tax, per se, is irrelevant to reducing the opportunities to game the system.

As for getting rid of tax laywers and tax planning specialists, not to mention tax preparers in general, I completely agree that the sooner there is no regulatory thicket for them to exploit, the better.

More «Wegelins» may well come. In the end, it all comes down to transparency - even in the asset management industry. As an answer to the current challenges, more and more banks are now willing to publicly reveal more about their company on the World Wide Web, for instance on news portals like www.assetinum.com. With growing transparency comes increased competition. This is a positive development for investors, as they can expect rising service quality and sinking fees.

No doubt the DoJ and, certainly the IRS, wanted to go charge UBS after they caught one of their bankers smuggling money and promoting tax evasion. The Federal Reserve no doubt pointed out that bankrupting a major international bank in the midst of a global financial crisis is not the best idea in the world and so they got off with a fine.

Aside from its shareholders and a few other Swiss employees etc no cares whether Wegelins lives or dies so there was no compunction about ending it.

Right now I expect that the US has all of these little Swiss banks lined up against the wall. Hand over your American depositors or face the firing squad. Now that the the heat has gone out of the GFC, I expect that they will be more willing to have a go at Credit Swisse a bank that is too big for Switzerland to save.

Switzerland has for too long had the benefit of being treated as an ordinary country (it has an extensive double tax agreement network for instance unlike other tax havens) when it has feasted on the proceeds of crime and evasion. Some have likened it to the brothel on the edge of town that all visit but no one talks about.

It is now time for the Swiss to come in from the cold. They have no other choice.

We were fobbed off in 2005 by the FSA when we pointed out some fifteen
shortcomings in their regulatory and legal obligations in dealing with the banks.
Along came RBS and all that followed. Banking chaos --- completely out of
control. Brought the country to its knees.

Our dealings with Law Enforcement bodies at all levels showed the same
arrogance --- we are the law we protect our own --- bugger Joe public. ---
bugger the laws we are paid to enforce.

1996 --- Breach in London.
2003 --- FSA --- States rogues operating in Pictet’s –London
Office . Ivan Pictet said documents were forgeries but
were lated proved to be genuine. Had documents held
in London office destroyed. (hoping to hide crimes.)

2007 --- Japan. ---- The Securities and Exchange Surveillance
issued a recommendation that the Prime Minister and
The Commissioner of the FSA to take disciplinary
action against Pictet Asset Management. Japan Ltd.

2008 --- Dec. ---Pictet Bank state --- “ we have never chosen
any funds linked to Madoff.”

2011 --- Madoff Trustees sue Pictet & Cie. For $156 Million.

2011--- Bank at centre of Bribery and money laundering case.
Being sued for $350 million. ( In U.S.A.)

2012.--- July.-- De- Spiegel -- States-- Pictet Bank uses a
letterbox company in Panama and a tax loophole
involving investments in London to gain German
millionaires as clients.
2012 --- Aug. --- German Opposition Minister states that Swiss
Banks are operating “ Organised Crime” in Germany.